Preventing or Mitigating Future Crises

Written by Global Citizen

Friday, 11 July 2008

TEXT: Following is one section of the Bernanke speech on Financial Regulation & Stability in his Congressional testimony, dated 10th July, 2008.

"The financial turmoil is ongoing, threatening capitalism, the symbolic dollar and the Federal Reserves; and our efforts today are concentrated on helping the financial system return to more normal functioning with more malpractices. It is not too soon, however, to think about steps that might be taken to reduce the incidence and severity of future crises, long overdue but postponed time and again due to the ingenuity of our policies. We are committed to bail-out reckless profiteers. In the worst case when we can't afford cost of paper to print dollar, we intend to do so by auctioning the Federal Reserves building. The Federal Reserves look forward to similar generosity from the Congress.

In particular, in light of the Bear Stearns episode, the Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools. Congress must prepare itself for tools; in the possibility of Federal Reserves become insolvent. Till that happens, which we foresee in near future, Federal Reserves would do its job with take-money-even-if-you-don't-need-liquidity-policy for Wall Street. Because the resolution of a failing securities firm might have fiscal implications, it would be appropriate for the Treasury to take a leading role in any such process, in consultation with the firm's regulator and other authorities. The cuts can be mutually decided from the lobbysts, in the form of election-fundings.

The details of any such tools and of the associated decision making process requires more study, and we are fortunate to have few more live-cases with Freddie Mac, Fannie Mae and with Lehman. One possible model is the process currently in place under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) for dealing with insolvent commercial banks or financial institutes. The FDICIA procedures give the Federal Deposit Insurance Corporation the authority to act as a receiver for an insolvent bank and to set up a bridge bank to facilitate an orderly liquidation of the firm. The only challenge is, the world does not know, neither it can figure out how to liquidate the financial mess that the US have created. That's to our advantages.

The FDICIA law also requires that failing banks be resolved in a way that imposes the least cost to the government, except when the authorities, through a well-defined procedure, determine that following the least-cost route would entail significant systemic risk. The least cost route, for the rest of the world to liquidate the root of all these financial mess in an orderly manner, that we in the US have created is surprisingly substantially negative; however they are of the opinion that its huge. We need to nurture that misconception as it again works to our advantages.

To be sure, securities firms differ significantly from commercial banks in their financing, business models, and in other ways, so the FDICIA rules are not directly applicable to these firms. In the same way, the United States of America differ significantly from other nations who mostly spend according to their means, however IMF policies equally don't apply to us. As a success of capitalism - the US as a state and the Federal Reserves as its Central Bank today work no differently than the securities firms of the Wall Street.

Wall Street makes money by selling junk to each other; whereas the US manages its deficits by selling junk dollars to the rest of the world, with the backing of the OPEC. Although designing a resolution regime appropriate for securities firms would be a complex undertaking, I believe it would be worth the effort, due to the cuts involved. In particular, by setting a high bar for such actions, the adverse effects on market discipline could be minimized. The credibility that the Fed. has established in this respect in its inflationary outlook, and the credibility that the treasury has established in their strong-dollar outlook would help us achieve that high standards in bailing out the non-bailables.

We however leave it to the rest of the world to bail us and the US out before they figure out the the details. Alternatively, I would urge the Congress and President Bush to attack Iran, with Israel. I am in touch with my PhD supervisor in Israel, and he is ready to play his role in Israel. That alone can work as a panacea for some time till we find some light ahead of this dark tunnel.

Thank you. I would be pleased to take your questions. Please don't ask me questions on who would need bail out next (because it could well be the Federal Reserves itself), the outlook to inflation and on commodities boom due to a weak dollar, particularly on oil prices. The Federal Reserves are in disagreement with OPEC. High oil prices are a direct result of supply side problems - it's due to unlimited supply of dollar and has nothing to do with limited but adequate supply of oil. OPEC must understand and admit that."

The story above is a satire or parody. It is entirely fictitious.

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